Analysts lift $A forecasts ahead of CPI data

Business Reporter

The Australian dollar has kicked off a busy week of data releases including CPI to trade slightly softer as its US counterpart continued to strengthen against a range of currencies.

The local unit, which has slipped from its four-month high of US94.63¢ two weeks ago, was buying US93.52¢ in late trade.

But the currency's recent strength – it has become the best-performing G10 ­currency against the US dollar this year – has prompted strategists to follow the Commonwealth Bank of Australia and lift their mid-year and year-end targets.

Credit Suisse strategists raised their forecasts for the Australian dollar from US85¢ to US91¢ in the next three months, and from US75¢ to US82¢ for the next 12 months.

"We underestimated the extent and persistence of [Australian dollar] strength, as the RBA has proven less averse to [Australian dollar] strength than we expected, Australian data has surprised to the upside, and the Chinese government has announced near-term stimulus aimed at supporting China's growth. "

TD Securities also raised its mid-year forecast from US88¢ to US95.5¢.

"There are many frustrated [US dollar] bulls out there, and we count ­ourselves as one of them," TD Securities Asia-Pacific Research head Annette Beacher said, adding that she was ­keeping the year-end forecast at US87¢ as the greenback eventually ­strengthens on the back of US Federal Reserve tapering.

The revisions came ahead of a crucial inflation reading for the March quarter, which could help set the direction of interest rates this year.

The surprise jump in four-quarter inflation last year saw the Reserve Bank dial down its "jawboning" on the need for a weaker exchange rate, amid concern an even lower dollar could push up inflation for tradeable goods.

At the same time, the recent strength of the Australian dollar has also meant the Reserve Bank would be reluctant to hike interest rates as that could spark a further rally in the local currency.

As such, a weaker-than-expected reading of inflation, when it is released by the Bureau of Statistics on Wednesday, could give the RBA some breathing room and even give it the opportunity start talking down the dollar again, Westpac senior currency strategist Sean Callow said.

Economists are expecting headline inflation to grow by 0.8 per cent and take the annual rate to 3.2 per cent - above the Reserve Bank's 2 to 3 per cent target band.

Underlying inflation, consisting of the trimmed mean and the weighted median measures and which is more closely watched by the RBA, is forecast to lift by 0.7 per cent for the quarter and 2.9 per cent year-on-year.

Investors would also been closely watching HSBC's flash reading of Chinese manufacturing activity for this month, to be released on Wednesday afternoon, as disappointment about an earlier release at the start of the year contributed to a bout of turmoil in emerging market currencies.

Meanwhile, analysts are expecting the Reserve Bank's counterparts in New Zealand to lift interest rates by 25 basis points for the second-straight board meeting when it meets on Thursday morning.

At the same time, the president of the European Central Bank, Mario Draghi, is set to speak late Thursday. Mr Draghi had recently flagged that a stronger euro could trigger an easing in monetary policy.